Thursday, December 27, 2012

Here is a random sampling of charts with up-to-date data that tell interesting stories about the economy and the markets. The economy continues to improve on the margin, albeit slowly, but markets are very nervous.

The Vix Index is a good proxy for the market's level of fear and uncertainty, and the 10-yr Treasury yields is a good barometer of the market's expectation for future economic growth. The Vix is elevated today, at just over 20, while the 10-yr Treasury yield is extremely depressed, at 1.7%. As the ratio of the two, shown in the chart above, moves up, the market is become more nervous and unsure about how weak the economy is going to be in the years to come. The outlook today isn't as bad as at over times of crisis (e.g., the three Eurozone sovereign debt crises, and the Lehman Bros. collapse), but it ranks pretty high compared to other crises in the past. There's little doubt that the market is very troubled and not at all confident that the economy is going to be growing much in the future.

After six years of a disastrous housing market, which saw average prices for homes fall by one-third in nominal terms, and over 40% in real terms, the evidence of a bottom is accumulating. According to the Radar Logic measure, prices are up over 8% in the year ending last October.

New home sales are up 38% from last year's all-time low. They are still very depressed, but there is some very important improvement occurring on the margin. Lots of potential for growth going forward.

Bad weather impacted last week's tally of unemployment claims, but the 4-week moving average is unlikely to be wildly off the mark. As the chart above shows, claims have hit a new low for the current business cycle. No sign at all of any impending downturn in the economy.

U.S. banks are now holding almost $7 trillion in savings deposits for retail customers, up from $4 trillion just over 4 years ago. Considering that savings deposits are paying almost nothing these days, this is rather extraordinary. People aren't flocking to savings deposits because of their yield; safety is the top concern of most people these days, and that is driven to a great extent by concerns for the future. It also suggests that if consumer confidence were to improve, there could be a veritable flood of liquidity headed away from banks and towards risky assets of all kinds.

It's likely that most people with savings accounts fail to fully appreciate how unattractive they really are. It's one thing to stash money in a savings account in order to preserve principal; it's quite another to stash money in a place where it is losing its purchasing power. As the chart above shows, the real yield on 3-mo. T-bills—a decent proxy for the real return on savings deposits—has been negative since Feb. '08, and for most of the past decade. Since Feb. '08, the real return on T-bills has been -6.4%. Contrast that to the 5.3% real return on the S&P 500 over the same period. Despite the extraordinary volatility of the equity market over the past 4+ years, stocks have beat savings deposits by over 12%, and money placed in savings deposits has lost over 6% of its purchasing power. Savers, in other words, are paying a huge price for safety that is proving illusory.

7 comments:

We are in the investment window of a lifetime -- more than a few investment tycoons will be born in the coming years -- value investors (bargain hunters) are in heaven -- growth investors are in hell -- now is the time to seek value with a long-term (30-year plus) investment horizon...

the one thing you have always been very stubborn to acknowledge is you have no way to know if the "beat" is sustainable. it is all nominal gains with no relationship to durability that is knowable in an environment of total monetary manipulation of all prices.

Of course there is no way to know if the beat is sustainable, and I have never claimed there was a way to know that. What matters is the odds of beating the return on cash. When cash pays nothing, it doesn't take much to beat it. When cash produces negative real returns it is even easier to beat it. And if the Fed makes a big inflationary mistake, which seems more likely the more they do QE, then the odds really begin to work against cash.

Surely there are scenarios in which cash beats most other things, but i think the odds of those scenarios is low. As I have said over and over, if the economy just avoids another recession, even if it grows very slowly, you are probably better off in anything but cash.

Very interesting charts and beneficial comments from regular readers. Scott, may I have your thoughts on the very first chart, the ratio between VIX and 10yr Treasury. There seems to have been a structural shift about 1996 and the spread has been exceedingly wide since. Using the IBES Valuation Model, that's about when stocks became extremely overvalued until 2000. After the tech crash, stocks have been extremely undervalued. Also, after 9/11 and the revelation of accounting scams in 2002investors/savers have avoided stocks, thus the $7 Trillion in savings. What caused the change in 1996 and how will we ever get all that cash moving out of the bomb shelter? There is no longer any confidence.